NIK on the stabilization of electricity prices
The minister responsible for energy issues did not prevent the surge in electricity prices. This was the case despite the EU’s coherent policy on reducing CO2 emissions and the awareness of its consequences for the Polish energy sector. The prices of CO2 emission allowances have continued to increase and the prices of energy produced from fossil fuels have therefore had to increase as well. The Electricity Law only worked in 2019 and was ad hoc in nature. According to NIK, the law was supposed to keep the government’s promises that electricity prices will not rise. But it was prepared in a hurry, against the legislative rules, without consulting the entities governed by the law and without fully assessing the impact of the new regulations. The necessary EU compliance notices were also not obtained. Price stabilization was only due to take effect in 2019. However, the law was amended four times at that time, including two times due to the violation of EU law. After the expiration of the law, that is to say after January 1, 2020, the prices of domestic electricity increased by almost 20%.
Electricity prices in Poland are determined by the prices of black and brown coal as well as CO2 price of emission allowances.
Entities using power plants emitting carbon dioxide, including power plants and power and thermal plants producing electricity from carbon and gas, must purchase CO2 emission allowances. Until 2018, allowances prices were not high due to their high supply. However, in April 2018, the European Parliament’s directive entered into force, modifying the allowance trading system. This led to a sharp increase in the prices of allowances, and as a result, energy prices in the wholesale market immediately began to rise. In the first quarter of 2017, a megawatt hour cost 160.6 PLN, while in the first quarter of 2020 it cost 250.9 PLN. Wholesale market trends have forced energy companies to prepare new price lists and even tariffs 50% higher than in 2018.
In November 2018, the government announced that electricity prices in 2019 would not increase as users of electric power need to be protected against a sudden increase in electricity costs. In December 2018, the Sejm adopted the Electricity Law which entered into force on January 1, 2019.
The following solutions have been implemented:
the excise tax has been reduced from 20 PLN / MWh to 5 PLN / MWh,
transient energy prices have been lowered,
a mechanism for maintaining electricity prices from the first half of 2018 to the end of 2019 has been put in place, assuming the simultaneous payment of lost income to trading companies.
Main audit findings
A strategic document on the electricity industry is Poland’s energy policy, adopted by the government in 2009. The next document is expected to be drawn up within 4 years. The following Poland 2040 energy policy was adopted on February 2, 2021, after the completion of the NIK audit.
In the public offices of the Ministry of Energy, there were units responsible for developing system solutions and conducting system analyzes of the electricity market.
In NIK’s view, the lack of regular analyzes of the energy market in2016-2020 was unreliable. According to NIK, legislative work on the electricity law could have started too late due to the lack of systematic monitoring of developments in the electricity market.
At the same time, in the second half of the 21st century, the European Union has constantly sought to reduce greenhouse gas emissions. In 2015, the European Parliament adopted the directive reducing the supply of CO2 emission allowances (entered into force in 2018). As a result, their prices have increased, which has led to an increase in the prices of electric power from fossil fuels.
The Minister of Energy has received many signals regarding rising energy prices, including from the Chairman of the Energy Regulatory Board (ERO). He communicated that four official energy suppliers have asked for an increase in energy prices from 30% to 35%.
Faced with the sudden surge in energy prices and the forecast for 2019, the Minister of Energy began work in September 2018 on a law to protect domestic energy users from royalty increases in 2019. However, neither the bill nor its amendment has been submitted to interministerial or public consultations. None of these documents has been advised by the competent bodies. The impact assessment of the law, attached to the draft law, did not include information on the data sources on the basis of which it was developed or the sources of funding for the proposed changes. In addition, the assessment did not include any analysis of the possible consequences for the electric power sector, including lost revenue or increased imports. NIK pointed out that none of the trading companies participated in any form of work on the original draft of the deed.
The Sejm adopted the law in December 2018. Since then, it has been amended four times. According to NIK, this shows that the first draft and subsequent modifications were poorly worked out. It also reveals that the principle of stability and reliability of legal provisions for the entities governed by these provisions has not been respected.
Work on the Energy Price Ordinance did not start until after the entry into force of the law (six months later). In accordance with applicable law, however, it should enter into force at the same time as the law under which it was promulgated.
The level of energy prices in the wholesale and retail markets has been continuously monitored by the President of ERO. At the end of 2018, a surge in electricity prices was reported.
Suspecting illegal practices, the President conducted two explanatory proceedings. As a result, two reports of possible criminal activity related to market manipulation were filed with the prosecutor’s office, which opened an investigation. The ERO president also took action after people operating in the energy market submitted their reports. In 2016-2020, the president of the ERO received nine reports of possible price manipulation from people involved in professional energy trading. After analyzing the situation, the President of ERO sent three reports to the Office of the Prosecutor, which received 21 signals from other entities. Some of them also resulted in reports of possible criminal activity.
The payment of compensation and price differences was handled by the Energy Settlement Operator (ESO). The money came from the Price Difference Payment Fund. According to NIK, ESO correctly planned the compensation amounts related to the 2019 electricity price freeze for end users and payments for energy companies. The energy settlement operator has adequately accepted and verified the benefit claims for the electricity trading companies. Information on subsidies, price differences and financial compensation was available to applicants and was provided in a clear manner, leaving no room for doubt. Energy trading companies audited by NIK charged adequate prices to energy users, but experienced delays in mandatory changes to contract and re-billing terms.
The implementation and enforcement of the Electricity Law was associated with high costs for the energy settlement operator and trading companies, for example for:
employment and training of new employees, payment of overtime pay and employee benefits;
the purchase of new software or its upgrade;
design, printing and mailing of customer information materials and additional invoices;
legal service, including the development of legal opinions regarding the interpretation and application of the provisions of the Electricity Act and the relevant ordinance.
The costs of implementing the new law totaled almost PLN 24 million. At the same time, the financial costs incurred by three trading companies reached almost PLN 47 million. The cost of paymentsthe Price Difference Payment Fund amounted to PLN 4.5 billion.
The savings of energy users of different tariff groups in individual companies have been estimated based on the prices applied to energy users in 2019 and the highest prices recommended in the tariff requests for 2019. In the tariff on most popular ‘G’, used by households, the average annual savings ranged from PLN 109 to PLN 305 per household. The highest amount saved by a user applying Tariff G was 127,000 PLN.
Among entities using tariffs not approved by the President of the ERO, the maximum savings were estimated at:
micro-entrepreneurs or small entrepreneurs: from 1.4 thousand PLN (tariff group C) to 591.7 thousand PLN (tariff group A) and 837 thousand PLN (tariff group B),
hospitals: from 421.5 thousand PLN to 1727.9 thousand PLN (tariff groups B and C),
public finance units: from PLN 37.6 thousand to PLN 228.6 thousand (tariff group C).
After the expiry of the electricity law, that is to say after January 1, 2020, the prices of electricity for tariffs (tariff G) increased by nearly 20%.
After the audit was completed on February 2, 2020, the Council of Ministers adopted Poland’s energy policy 2040. Therefore, NIK did not refer to the solutions adopted in terms of energy price stabilization, including lower production costs. NIK is in the position that the consistent provision of conditions to reduce the production of energy from high-emission sources will stabilize prices while ensuring the security of deliveries of electrical energy.
To the Minister of Climate and Environment of:
exercise due diligence in the drafting of normative acts and include the provisions set out in the legal drafting rules and working conditions of the Council of Ministers,
properly develop legislative solutions, including consultations (in a broad sense) with important stakeholders and verification of draft provisions in accordance with EU law,
effectively monitor market processes in the field of electricity pricing and make it one of the tasks of the relevant service.
To the President of the Energy Regulatory Board – to introduce organizational changes and procedures allowing for the rapid completion and continuous conduct of analyzes to identify abuse and manipulation in the wholesale energy market.